Guard against a liquidity crisis for your heirs
By Elmie de Jager
31 October 2020
A few weeks ago, my colleague wrote an article about how the largest share of family assets are often owned by the husband.
He pointed out that it usually works well, until the husband dies. In these cases, the will usually states that the surviving spouse inherits everything, but often a liquidity problem will arise for the surviving spouse while the estate is wound up.
When married in community of property the assets of both parties is supposed to be frozen, but in practice it fortunately is often not the case. However, it is important that both parties have their own bank accounts.
In the interest of orderliness with regards to the settlement of an estate, it is important to note how each of your financial products will be dealt with.
Let us start with assets that would not have to be dealt with by your executor and which can be distributed to the beneficiaries outside of the estate process.
Retirement annuity/pension fund/provident fund:
These vehicles are subject to Regulation 28 of the Pension Funds Act and is strictly regulated.
Section 37C of the Pension Funds Act allow the trustees to determine who should inherit the money and in what proportion.
It is important to realize that the beneficiary clause in terms of your pre-retirement money is simply a “wish” that you express. The trustees of the annuity fund may and will under certain circumstances distribute the benefits differently than you indicated.
However, fairness and a fiduciary responsibility will always be the basis of their decision-making process.
Where there are complex family structures (such as multiple marriages or children born out of wedlock) the determination regarding who should receive what can delay the distribution process for up to 12 months and leave the heirs with cashflow problems.
Living annuities are not subject to the Pension Funds Act, but subject to the Long Term Insurance Act, and therefore there aren’t trustees who have to decide who will receive the money and the product provider will execute your beneficiary clause.
This is a quick way to get an investment (outside of the estate) in the hands of the intended heir.
If the surviving spouse is a beneficiary of a family trust, the trustees will be able to make funds available to the surviving spouse.
However, it is important that the spouse is an income and capital beneficiary, otherwise they will only receive income and no capital.
Beneficiary – Life Insurance:
Insurers will pay the benefit to your nominated beneficiary upon receipt of a death claim and a death certificate. The process may take between 2 weeks to a month to finalise. If the cause of death was unnatural there will be a judicial inquiry which may substantially delay the payout process.
Beneficiary – Endowment Policy:
Most investments like shares, unit trusts or physical property can’t be distributed to a beneficiary outside of the estate and will form part of the completion process (and is therefore also subject to executor fees), but with an endowment policy you can nominate a beneficiary, which means returns on the investment can be distributed directly to your beneficiaries (outside the estate).
Another benefit of an endowment policy is that Section 63 of the Insolvency Act is applicable. It stipulates that if the endowment policy has been in force for at least 3 years, it will be protected from creditors. If a risk exists that your estate may be insolvent, creditors will not be able to lay their hands on the money.
Which assets falls within the estate and must be managed by the executor?
The above-mentioned assets will be caught up in the estate process and can in some cases take several years to complete.
Just a few notes regarding the executor:
The maximum fee charged by an executor is 3.5% plus VAT or 4.025%. If the above-mentioned assets are substantial (and if you own a primary residence and a few other assets, it quickly becomes substantial) the executor’s fee become excessive.
If you appoint an institution (such as a bank or trust company) as your executor, you can almost be certain that you will pay the maximum fee if you do not negotiate in advance. So, make sure to discuss this in advance or appoint your spouse as the executor, who can then outsource the work.
The executor earns, over and above the executor’s fee, 6% on all income earned on estate assets.
Where there is a lot of rental property or high dividend paying shares, it can become substantial and cause a conflict of interest with regards to the urgency to settle the estate.
Finally: Proper succession is one of the last impressions you leave. Make sure you do not leave your heirs with a headache, pay attention to estate costs which will be payable and avoid taxes where possible.
A competent financial planner will be able to help you or at least explain the implications.
If you have significant assets in your personal name and have not recently done an estate analysis you should ask your financial advisor or auditor to do this exercise for you.
Elmie de Jager is a certified financial planner of ProVérte Wealth and Risk Management. Contact her at firstname.lastname@example.org.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.